Loans to directors - all change
Did you know?
- The law up to October last year prohibited companies from making loans to their directors;
- Directors’ borrowing of an aggregate of more than £5,000 from their company was an illegal act;
- That such loans to directors could have resulted in a fine being imposed or a term of imprisonment;
- That loans for these purposes included simply having an overdrawn director’s loan account?
Did you also know?
- That if a director authorised a loan by the company to another director, he was jointly liable to repay that loan to the company even though he did not take any benefits from it personally;
- Even if a director did not authorise the loan but subsequently found out about it and did nothing or insufficient to recover it he could be jointly liable to repay it;
- In the context of a declaration of an illegal dividend, the High Court has held directors to be jointly liable to repay monies even though they were not specifically aware of the declaration of the dividend which had to be repaid? In essence, this judgment is saying that whilst the payment may not have been made to you personally, you may have to repay it even if you did not know it had been taken out of the company if you were aware of this type of payment having been made throughout the trading history of the company or where you turn a blind eye to it.
Rather frightening to think that your co-director’s precarious personal finances could backfire on you!
For once I am able to bring good news to directors – this law was watered down in October this year. Loans to directors are now permitted. They have to be approved by a resolution of the members of the company, preferably in advance of the loan being made, but retrospective consent can be given provided that it is within a reasonable period after the loan is made.
For those directors who have overdrawn loan accounts or have paid, for example, for holidays or other personal spending on the company’s credit card - if you took those benefits before the 1st October, I recommend that you take advice on whether those “borrowings” should be repaid without delay. If you have incurred “borrowings” from your company since that critical date, I recommend that you obtain the required resolution from your members without delay.
Finally, if you know that any of your co-directors falls within any of the above, do not let them take the ostrich approach. Joint liability still applies if the correct procedures are not followed. If you are the one who is worth pursuing, someone (usually a liquidator) will take the action against you, regardless of whether you had the money in the first place.
